Supplier Rationalization vs. Optimization: Which Works Best for Your  Contingent Workforce Program?

Key ideas presented in this blog are provided by contingent labor supply-base professional, Eric Osterhout, Sr. Specialist of Category Management, Contingent Labor for a multinational midstream energy organization.

As contingent workforce programs grow more complex, supply base management has become a critical focus for enterprise leaders. Two strategies consistently emerge in these conversations: rationalization and optimization.

While often used interchangeably, these approaches have distinct goals. Rationalization is a focused effort to reduce the number of suppliers in a managed service provider (MSP) program to cut costs, enhance efficiency, and strengthen relationships. Optimization is the broader, continuous process of refining the supply base to ensure peak performance and strategic value, including both cutting and adding suppliers where necessary.

So which strategy works best for your contingent workforce needs? We spoke with Eric Osterhout to gain more insights.

Rationalization vs. Optimization: The Critical Distinction

To truly understand the difference between these two strategies in the contingent workforce space, it helps to view rationalization as a tactical project and optimization as a strategic, ongoing program. Rationalization is the crucial first step that clears the way for effective optimization.

A Case Study in Contingent Supply Base Management

For Osterhout specifically, the need for changes arose when the midstream energy company he manages the contingent labor supply base for was acquired by another organization—forcing them to “harmonize,” or merge, two contingent workforce programs.

Phase 1: Supplier Rationalization (Reducing 200+ Vendors)

With more than 200 suppliers to account for, the rolling out of a new VMS and HRIS, and time-sensitive deadlines for go-live approaching, placing all of those suppliers under contract was impossible.

In this instance, Osterhout and his team decided to rationalize their supply base. They ultimately removed around 70 suppliers from the program in 90 days—terminating their supplier agreements and moving their remaining workers under the enterprise payrolling partner, or moving them to a sub-contracting agreement under an approved in-program supplier. This massive effort achieved immediate risk mitigation and cost reduction through volume consolidation.

Phase 2: Supplier Optimization (Refining for Candidate Quality)

Once the new harmonized program went live, Osterhout moved from a rationalization mindset to an optimization one. With still too many suppliers in the program, an overabundance of competition meant suppliers weren’t going to provide their A-list candidates because of a lower chance of success for them.

As such, Osterhout and his team are currently in the process of analyzing the quality of their current suppliers via existing metrics (quality of candidates, manager satisfaction, category of labor, etc.), and are looking to see where they still need to cut suppliers versus where they may need to add some in to address skill gaps or enhance vendor performance.

Supplier Rationalization vs. Optimization: When to Use Each Strategy

As Osterhout likes to put it, a supply base is a living, breathing thing; not something that should remain static. While they are mostly in a place where they’re optimizing their supply base, they have seen areas where they have had to go back to a rationalization mentality (i.e. having too many IT professional suppliers).

Since there’s no magic number of suppliers to make a program optimal (as the ideal number depends on factors like geographical spread, labor categories, and annual spend), knowing when to focus on each strategy is crucial.

When to Focus on Supplier Rationalization

• When there are redundancies in your supply base (e.g., too many suppliers for one labor category or geographical area).
• When you have too many suppliers to properly manage or foster healthy competition.
• When you have consistently underperforming suppliers that pose an operational or compliance risk.
• After a merger or acquisition forces the consolidation of multiple programs.

When to Focus on Supplier Optimization

• When there are gaps in your supply base (e.g., not enough suppliers for a certain niche labor category or specialist geography).
• When you need to fill roles quickly, but consistently receive low-quality candidates.
• When existing suppliers fail to meet Key Performance Indicators (KPIs) like time-to-fill or worker retention.
• When you need to improve contract management and elevate key vendors into true strategic partners.

Once you have coverage for all of your labor categories and geographies, and a healthy number of suppliers in each to make it competitive, you’ll likely have the right number of suppliers for your contingent workforce program. However, it’s important to still monitor performance and constantly evaluate how the supply base as a whole is performing to meet your program’s needs.

The Role of Strategic Partnership and Risk Mitigation

Ultimately, when it comes to managing the supply base for his program, Osterhout emphasizes the importance of looking at suppliers as partners, instead of just vendors. Although you might decide to part ways with a supplier at one point in time, that does not mean they won’t be able to serve your program’s needs in the future. Further, a supplier that is performing well now could end up needing to be rationalized out if changes within their own organization (account management, leadership, etc.) lead them to underserve your program.

At the end of the day, you want to find the best resources, in the most cost-efficient manner, deployed as quickly as possible. While you cannot have all three at the very top priority, the ability to find a balance through a well optimized and rationalized supply base—one that emphasizes the importance of relationships—can help you find success!

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